We Think Cosmo Pharmaceuticals (VTX:COPN) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Cosmo Pharmaceuticals N.V. (VTX:COPN) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cosmo Pharmaceuticals

What Is Cosmo Pharmaceuticals's Net Debt?

The chart below, which you can click on for greater detail, shows that Cosmo Pharmaceuticals had €169.5m in debt in June 2022; about the same as the year before. But it also has €219.0m in cash to offset that, meaning it has €49.5m net cash.

A Look At Cosmo Pharmaceuticals' Liabilities

We can see from the most recent balance sheet that Cosmo Pharmaceuticals had liabilities of €23.8m falling due within a year, and liabilities of €272.2m due beyond that. Offsetting these obligations, it had cash of €219.0m as well as receivables valued at €28.9m due within 12 months. So its liabilities total €48.2m more than the combination of its cash and short-term receivables.

Given Cosmo Pharmaceuticals has a market capitalization of €1.02b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Cosmo Pharmaceuticals boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Cosmo Pharmaceuticals is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 331% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cosmo Pharmaceuticals's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Cosmo Pharmaceuticals has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Cosmo Pharmaceuticals recorded free cash flow of 46% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Cosmo Pharmaceuticals has €49.5m in net cash. And we liked the look of last year's 331% year-on-year EBIT growth. So we don't have any problem with Cosmo Pharmaceuticals's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Cosmo Pharmaceuticals has 1 warning sign we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.